Fueling the Slope: State, majors can do better

Having warned readers, I now sound off about something that really bugs me.

Our North Slope oil producers need a lot of fuel. Drill rigs, trucks, bulldozers and other heavy equipment use lots of diesel and gasoline. The industry uses methanol to freeze-protect equipment in producing wells, among other uses.

All that is made from crude oil and natural gas. We have lots of crude oil and natural gas on the North Slope. Do we make these fuels there? No.

We move crude oil by pipeline to Valdez, load it on a small shuttle tanker to take it to Cook Inlet and to the Andeavor (formerly Tesoro) refinery near Kenai. Diesel and gasoline is made and those are shipped back to the North Slope, by rail to Fairbanks and then by truck up the Dalton Highway to the North Slope.

Some crude is refined into diesel in Valdez at the small Petro Star refinery there and then trucked north on the Richardson Highway, which parallels the trans-Alaska oil pipeline that brought the crude oil south.

Think of all that carbon footprint, wear and tear on roads and the accidents when big fuel trucks roll over, causing spills and occasional injuries. Some of these cost a million dollars or more to clean up, and sometimes the state gets the tab if the trucking company doesn't carry enough insurance.

There are explanations, and they're complicated. Some of this is due to a blockheaded decision made by state officials in 2006. Some may be also due to a certain inertia by the producing companies, a reluctance to try out new technologies.

Some fuel is actually made on the slope and has been since the oil fields started up in 1977. Two small "topping plants," very simple refining units, make high-sulfur diesel. Some pipeline pump stations were equipped with topping plants to make turbine fuel.

Things got complicated, however, when the U.S. Environmental Protection Agency enacted a rule requiring use of ultra-low sulfur diesel in trucks and heavy equipment, followed by similar rules covering gasoline. Removing sulfur from diesel takes special equipment and costs more.

When EPA came down with its rule, North Slope producers wanted to equip their small topping plants to make the ultra-low sulfur fuel there. In what I think is a really dumb decision, state tax officials ruled the costs of equipping the plants could not be a deduction for the companies in the state's net-profits production tax. That decision made the plant conversions more expensive.

In response, the companies decided to just buy the ultra-low sulfur fuel from refineries in southern Alaska and truck it to the slope. Those expenses were deductible.

While it's great to create truck-driving jobs there are broader societal costs here that need to be considered – think of those rollovers. There's more to this, though.

In recent years small technology companies have proposed new processes to make ultra-clean fuels from natural gas. Gas-to-liquids has been around for decades but the plants were very large and expensive. Now the technology has been compressed enough to allow small, compact plants to be built.

This is new, and the first commercial small GTL plants are now being built in the Lower 48. The process is different than conventional refining and makes products that are much cleaner.

There are small companies proposing to build one or more of these plants on the slope.

Harold Heinze, former Arco Alaska president and state resources commissioner, feels a plant like this could make several products including exotic liquids for enhanced oil recovery. High-value specialty waxes could also be made. Those could be exported off the slope.

This is a niche for small, nimble technology entrepreneurs, not big companies. Major producers admit specialized projects like these are best done by small firms. There's a reason why the Lower 48 shale oil revolution was led by small technology companies rather than the big majors.

I'm puzzled as to why these small firms can't get to first base on their North Slope plants. What's needed is some support from the customers with multi-year purchase contracts so the plants can be financed. The producers prefer year-to-year purchasing, however, which doesn't do anything for a small company working to finance construction.

To me, this smacks of simple inertia – big companies just doing business as usual, trucking and spilling, and not willing to take a chance on something new. Spills aside, making fuel on slope is likely to be cheaper than trucking it up.

It wasn't always this way. When the Prudhoe Bay field was built in the 1970s BP took a chance with a contract to a small Alaska startup, Dowland Bach, to design and build control systems for producing wells adapted to Arctic conditions. Nothing is so important as control systems on oil wells, so this was a big deal.

Brian Davies, a senior BP manager, made this call to back a small Alaska company rather than taking the less-risky approach of contracting with big oil technology firms like Schlumberger or Halliburton. Dowland Bach is now one of Alaska's most successful oilfield tech-support firms.

The lesson from this, I guess, is that as an industry matures it can become conservative and cautious, and unwilling to take chances. I always took pride in innovations being done in Alaska. It doesn't always happen, though.

Tim Bradner is co-editor of Alaska Legislative Digest and Atwood Visiting Professor of Journalism at University of Alaska Anchorage.